November 14, 2013

© Wadia Ghandy Singapore LLP

Presentation Made For: IE Singapore

Presented By: Nicole Shroff, Wadia Ghandy Singapore LLP

LEGAL FRAMEWORK

Regulatory Regime

o Foreign Exchange Management Act, 2000 (“FEMA”) and notifications issued thereunder;

o Securities Contract Regulation Act, 1956 (“SCRA”);

o Securities Exchange Board of India Act, 1992 and regulations issued thereunder;

o Consolidated FDI Policy and Press notes issued from time to time;

o AP (DIR) Circulars issued by Reserve Bank of India (“RBI”);

o Companies Act, 1956 and Companies Act 2013 (“Companies Act”) and rules and regulations issued thereunder;

o Other central and state legislations depending upon the nature of business.

Governmental Authorities

o Department of Industrial Policy and Promotion (“DIPP”), Ministry of Commerce & Industry;

o Project Approval Board (“PAB”), DIPP, Ministry of Commerce & Industry;

o Secretariat Industrial Assistance (“SIA”), DIPP, Ministry of Commerce & Industry;

o Foreign Investment Promotion Board (“FIPB”), Department of Economic Affairs, Ministry of Finance;

o Reserve Bank of India, Ministry of Finance;

o Securities Exchange Board of India (“SEBI”);

o Cabinet Committee of Economic Affairs (“CCEA”);

o Competition Commission of India (“CCI”);

o Sector Specific Regulators: IRDA (Insurance), TRAI (Telecom) etc.

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CONTD…..

Economic Laws and Regulations

Indian Contract Act, 1872;

Protection of Intellectual Property Rights through the Copyright (Amendment) Act, 2012, the

Trademarks Act, 1999, Geographical Indications of Goods (Registration and Protection ) Act, 1999,

Patents (Amendments) Act, 2005 and Designs Act, 2000;

Labour Laws

• Industrial Disputes Act, 1947

• Trade Unions Act, 1926

• Plantation Labour Act, 1951

• Payment of Bonus Act, 1965

• Payment of Gratuity Act, 1972

• Workmen’s Compensation Act, 1923

• Industrial Employment (Standing Orders) Act, 1946

• Minimum Wages Act, 1948

• Payment of Wages Act, 1936

• Factories Act, 1948

• Employees Provident Fund and Miscellaneous Provisions Act, 1952

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CONTD….

Maternity Benefit Act, 1961

Employees State insurance Act, 1948

Contract Labour (Regulation and Abolition) Act, 1970

Anti Trust Regulations

The Competition Act, 2002

Consumer Protection Act, 1986

Negotiable Instruments Act, 1881

Sale of Goods Act, 1930

Arbitration and Conciliation Act, 1996

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Under the permitted sectors, there are two routes for FDI. Each of the routes are

regulated separately with conditions.

Automatic Route

100% investment in all sectors except those specifically prohibited or those with

specific sectoral caps.

Approval Route

Specified investments shall require Government/FIPB approval.

• proposals that require an industrial license;

• proposals in which the foreign collaborator has a previous venture/tie up in

India;

• proposals relating to acquisition of existing shares in an existing Indian

Company by a foreign investor;

• proposals falling outside notified sectoral caps or under sectors in which FDI is

not permitted.

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ENTRY OPTIONS INTO INDIA

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Particulars Liaison Office Project

Office/Branch

Office

Subsidiary

Company/JV

Company

Limited

Liability

Partnership

Setting Up

Requirements

Prior approval of

the RBI required

Prior approval of

the RBI required

for BO (other than

undertaking

manufacturing and

service activities in

SEZs)

Prior approval of

RBI not required

for a PO if

conditions are

fulfilled

If activities fall

under the

automatic route

then no RBI

approval.

Foreign

investments

allowed in sectors

which are 100%

automatic route

with the prior

approval of the

GOI/FIPB

Compliance

under Companies

Act

Registration and

periodic filings of

accounts.

Registration and

periodic filings of

accounts.

Higher statutory

compliance and

filing

requirements

Registration with

ROC. Filing

annual accounts

annual statement

on solvency.

CONTD…. Particulars Liaison Office Branch

Office/Project

Office

Subsidiary

Company/JV

Company

Limited Liability

Partnership

Permitted Activities Only liaison/

representation/

communication

role permitted

No commercial

or business

activities

allowed to be

undertaken

Activities listed/

permitted by RBI

allowed to be

undertaken

Manufacturing and

processing activities

(except in SEZ units)

not permitted for

BO

PO is permitted

to undertake only

Specific activities in

relation and

incidental to the

execution of the

project

Any activity

Specified in the

MOA of the

company

Wide range

of activities

permitted, subject

to FDI guidelines

LLP should

be engaged in

sectors/activities

for which 100%

FDI is allowed

without any

approval

LLPs with foreign

investment will

not be eligible

to make any

downstream

investments

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CONTD……

Particulars Liaison Office Project

Office/Branch

Office

Subsidiary

Company/JV

Company

Limited Liability

Partnership

Funding of local

operations

Local expenses

to be met

out of inward

remittances

received from

abroad from

the Head

Office through

normal banking

channels

Local expenses to

be met through

inward remittances

from head office or

from earnings

from permitted

Operations.

Funding to be

through equity

or other forms

of permitted

capital infusion

or borrowings

(local as well

as overseas as

per prescribed

norms) or internal

accruals.

Contribution in

the capital of the

LLP should be

through inward

remittance or

by debit to NRE/

FCNR account of

the designated

partner

LLP ‘s not eligible

to raise ECBs.

Limitation of liability Unlimited Unlimited Liability limited to

the extent of equity

participation

Limited to the extent

of the agreed

contribution except

in case of fraud etc. 8

CONTD……

Particulars Liaison Office Project

Office/Branch

Office

Subsidiary

Company/JV

Company

Limited

Liability

Partnership

Repatriation

of Funds on

an on going

basis

Since the LO does

not undertake any

business activity

there may not be any

repatriations,

however, in case of

closure of the LO,

any surplus cash

maybe repatriated

with RBI approval.

No approval for

remittance of

post tax profits,

subject to filings

with the RBI.

No approval for

remittance of

post tax profits.

Dividends

declared will be

subject to

distribution tax.

No approval for

remittance of

post tax profits.

Exit

Mechanism

Prior approval of the

RBI, ROC and the

Income Tax

Authorities.

Prior approval of

the RBI, ROC and

Income Tax

Authorities.

Exit through sale

of shares or

winding up or

liquidation.

Foreign partner

permitted to

transfer its stake

in LLP/dissolve

the LLP.

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FORMS OF BUSINESS ENTERPRISE

Company

Sole Proprietorship

Partnership

Limited Liability Partnership

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FUNDING OF INDIAN BUSINESSES

Equity Share Capital- limited by the authorised capital specified in the MOA. Equity shares need to be

issued by the Indian company within 180 days of receipt of funds from the investor.

Preference Share Capital – Foreign investment through convertible preference shares, which are

compulsorily convertible into equity are treated as FDI.

Debentures and Borrowings - Foreign investment through convertible preference shares, which are

compulsorily convertible into equity are treated as FDI. Debentures that are not compulsorily

convertible into equity shares are construed as ECBs and hence need to conform to the ECB

Guidelines.

External Commercial Borrowings

Debt raised in foreign currency by an Indian company. Can be accessed through the automatic or

approval route from internationally recognised sources. The maximum amount of an ECB that can be

raised by a corporate other than those in the hotel, hospital and software sectors is USD750mn in a

financial year. ECBs upto USD750mn for rupee and foreign currency expenditure fall under the ambit

of the automatic route. Borrowers can be companies registered under the Companies Act and

Infrastructure finance companies barring financial intermediaries. ECBs have end use restrictions

and cannot be used for on lending, investment in capital market, acquiring a company, working

capital, general corporate practice, repayment of existing rupee loan and real estate.

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CONTD....

ADRs/GDRs/FCCBs

Qualified Indian companies can raise equity capital abroad through the

issue of ADRs/GDRs/FCCBs.

Approval is required if the issue of the ADR/GDR would result in exceeding

the permissible limit of investment under FDI and if the investment is being

made in a sector that requires approval.

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REPATRIATION OF FUNDS

Repatriation of capital after payment of taxes, subject to any lock in conditions

applicable in the sector of investment.

Remittance of fees for know how, technical services and royalty is permitted subject to

withholding tax, if any.

Repatriation of dividends after payment of dividend distribution tax, subject to

compliance with certain conditions.

Remittance of up to USD1mn per project (USD10mn for projects in the infrastructure

space) for any consultancy services procured from outside India.

Remittance of the reimbursement of pre-incorporation expenses in India is permitted

upto 5% of the investment brought into the country or 0.1mn whichever is higher.

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ISSUES FACED BY ENTREPRENEURS

LAND ACQUISITION ACT 1894– LAND ACQUISITION AND REHABILITATION AND RESETTLEMENT ACT,

2013

LAND CONVERSION

LICENSES AND PERMITS AND APPROVALS – forest and environmental clearances

CORRUPTION

COMPLICATED EXITS –Shutting down is cumbersome no single window clearances; Selling out may be

subject to capital gains after the Vodafone judgement (taxation as a representative assessee),

Buyback, Pricing issues (DCF).

LABOUR LEGISLATIONS TOO MANY TOO COMPLICATED AND TOO STRINGENT

SUCCESSION TO CRIMINAL LIABILITY – no developed regime for mistakes of predecessors.

CASH TRAP – reduction of share capital, buy back (buy back tax), dividends (dividend tax), loans.

RESPONSIBILITY

WEIGHTS MEASURES ACT, 1976 REPLACED BY THE LEGAL METROLOGY ACT, 2009 – increased

compliances

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CONTD.......

INADEQUATE FUNDING – reluctance by Banks to lend, disregard guarantees being given

by NHAI for project loans. Debt (very structured), Equity (mez funding is a problem

because of the restriction on transfer of shares, pay out to the investor is fettered by the

pricing guidelines)

COST ISSUES - infra companies have more than SGD300 crores locked up in on going

road projects. Officials are reluctant to approve even routine cost escalations because

questions raised by the auditors.

DISPUTES OVER PROVISIONAL TARIFF for a new power station - declared unconstitutional

by the Kolkata High Court.

Some of the commercial issues that affect foreign investors operating in India are:

• inadequate handling of statutory legal compliances by the Indian partner;

• management control i.e. (Indian corporate laws over ride any private contractual terms

between the joint venture partners, unless such terms are addressed and reflected in the

Articles of Association of the company);

• protection of intellectual property rights; and

• double taxation issues.

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DISPUTE RESOLUTION

Typically, a good dispute resolution clause includes reference to:

• the law governing the contract and dispute;

• the procedure to be followed;

• the method of resolution (ie, arbitration or litigation);

• for arbitration, the complete process, including constitution of the tribunal, applicable procedure,

venue and language; and

• for litigation, the jurisdiction of the courts.

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Supreme Court

High Court

District and Sessions Courts

Sr. Sub Judge (Civil Cases) Chief Judicial Magistrar

(Criminal Cases)

ARBITRATION

Bharat Aluminium Company Ltd (BALCO) Vs. Kaiser Aluminium Technical Service Inc (Kaiser)

Facts:

• Kaiser was to install a computer based system at Balco’s premises.

• The arbitration clause in the Agreement provided for Indian governing law but arbitration proceedings

to be governed and conducted under English law.

• Disputes arose and BALCO approached the district court and high court for reversal of the arbitral

award. The appeal was reject by both courts. Therefore BALCO appealed to the Supreme Court.

Decision and Prevailing Position in Law:

• Part I of the Arbitration and Conciliation Act, 1996 would only apply to arbitrations having their

seat/place in India.

• Indian courts do not have power to grant interim relief when the seat of arbitration is outside India.

• Distinction between seat of arbitration and place of arbitration.

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SUGGESTIONS –WAY FORWARD

Extreme Approach - Change the laws through corporate lobbying.

Balanced Approach

Entrepreneurs should structure innovative products with minimum regulatory hindrances.

Effective strategising –

• enter into legally enforceable contracts.

• contract should include adequate promoter responsibility clauses to ensure that

the promoter delivers in time.

• avoid the promoter and the contractor being one and the same to minimize conflict

of interest issues (as in EPC road contracts).

• dispute resolution clause in the agreement should be carefully worded and in line

with international norms and standards.

• Dedicated disaster management team to foresee risks in a project and have

alternative effective strategies. (eg in a road construction project, if the NHAI

approval is not obtained)

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CONTD........

Advanced rulings can be obtained to tackle prospective transfer pricing issues.

Shift from BOT mode (Build operate transfer)to EPC mode (Engineering Procurement and

Construction), the latter gets govt. aid.

Single window clearance was proposed in Dec 2012.

Government is trying to minimise transportation costs by encouraging coal suppliers to supply 80% of

required level of coal to projects closer to the mines.

Enactment of the State Electricity Distribution Responsibility Bill to make states more responsible for

the financial health of the electricity boards, the bill envisages periodic revision of tariffs,

restructuring the debt of electricity boards and converting the past losses to equity.

In December 2012 a proposal for licensing of land to concessionaires for the development of ports

was approved by the govt. this would lead to better development of trade and commerce.

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POINTS TO REMEMBER……

Clauses should be specific, precise and unambiguous in transaction documents involving

multiple jurisdictions.

Governing law Indian law - when an Indian entity is involved and especially if the assets

are located in India. Resulting in efficacious remedies rather than when the governing law

is that of a foreign country and must be interpreted by Indian courts, or if an order of a

foreign court must be enforced in India.

Specifically exclude conflict of laws principles - Conflict of laws principles can generate

substantial subjectivity that could become an obstacle for a party legitimately seeking

relief for a breach. This will ensure that even if the subject matter of a dispute is capable

of being covered under different agreements and subject to different governing laws,

Indian courts will uphold the terms of the contract specifically subjected to Indian law.

Ensure uniformity and alignment between applicable laws, rules, venue and forum for

arbitration, enforcement of foreign judgments and awards in India, apart from considering

the logistics of perhaps having to manage multi-jurisdictional legal teams, including the

costs.

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THANK YOU

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